In 2016/17, there will be a UK referendum on whether or not to stay in the EU. Most of the arguments, particularly currently espoused about what PM Cameron might secure in terms of EU reform, are political. What about the economics?
- In or out, it won’t come cheap. Some EU-sceptics talk about repatriating funds from the EU worth £50mn a day. Dream on – that’s gross and the costs of extracting UK from all the current arrangements will cost money. If there is no Common Agriculture Policy or development funds for Cornwall, do you think the UK government will do nothing to soften the blow for those affected at home? Just think how much money the lawyers are going to make from re-writing contracts and how many civil servant/ bureaucrats we’ll need to make the change… It could easily take five years to extract the UK from current contracts and processes and replace them with new ones.
- Meanwhile, there will be an investment strike. If you are a foreign-owned multinational based in the UK, faced with great uncertainty as to the vote and its eventual result, at the very least, you’ll 1) wait and see or 2) you may re-direct investment to facilities still likely to be in the EU or low-cost centres elsewhere and, at worst, 3) you’ll close UK operations and supply the UK market from continental Europe – with potentially disastrous consequences for UK exports and productivity.
- UK borrowing costs and sterling volatility will rise and fiscal. management may be disrupted, at least in the near term. This will also encourage overseas rather than domestic activity – investment, employment and trade. Again, uncertainty and borders restrict exchange and wealth creation.
- Migration flows will shift – unpredictably. The UK recovery has benefited from net migration over the last few years – this could reverse, again with a short term negative economic shock and, perhaps, wider politico-social (e.g. NHS) effects.
- In the long run, however, it is quite feasible for a good relationship to emerge between an outside UK and an ‘ever closer’ EU, as it does for Norway, Switzerland, et al. In a decade or so, no economist, let alone politician, can tell you whether we’ll be better or worse off in or out of the EU especially if, as a result, Scotland becomes an unreliable, one-party, independent state. All we can say is there will be winners and losers and it won’t be easy to spot who will be which, bar the usual suspects.
The economic issue for me is the short term – by which I mean 3- 5 years after an ‘out’ vote. BREXIT will cost the UK a lot of economic activity and potential that it might otherwise have. BREXIT still might be the right political and social choice for our island race.
I only hope the forthcoming debate makes the real costs and benefits of the two options clear to us all in great detail before we get to the actual vote.